| 2. | Determine the product factory overhead costs, using the multiple production department rates in (1). Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries. Evaluating selling and administrative cost allocations Gordon Gecco Furniture Company has two major product lines with the following characteristics: Commercial office furniture: Few large orders, little advertising support, shipments in full truckloads, and low handling complexity Home office furniture: Many small orders, large advertising support, shipments in partial truckloads, and high handling complexity The company produced the following profitability report for management: | Gordon Gecco Furniture Company | | | | | | | Product Profitability Report | | | | | | | For the Year Ended December 31 | | | | | | | | Commercial Office Furniture | Home Office Furniture | Total | | Revenue | $5,600,000 | $2,800,000 | $8,400,000 | | Cost of goods sold | 2,100,000 | 980,000 | 3,080,000 | | Gross profit | $3,500,000 | $1,820,000 | $5,320,000 | | Selling and administrative expenses | 1,680,000 | 840,000 | 2,520,000 | | Income from operations | $1,820,000 | $ 980,000 | $2,800,000 | The selling and administrative expenses are allocated to the products on the basis of relative sales dollars. Evaluate the accuracy of this report and recommend an alternative approach. The selling and administrative expenses should on the basis of relative sales dollars. The two product lines have very different attributes. The commercial product is relatively inexpensive to sell, while the home product has a number of additional costs associated with it. As a result, allocating selling and administrative expenses using sales volumes would allocate selling and administrative expenses to the commercial product and to the home product. The commercial product would receive as much selling and administrative expenses as the home product because it has twice the sales. An activity-based approach would trace the selling and administrative costs to the products based upon their actual consumption of activities. Such an allocation would show the commercial product to be more profitable than indicated and the home product to be less profitable than indicated. Salty Sensations Snacks Company manufactures three types of snack foods: tortilla chips, potato chips, and pretzels. The company has budgeted the following costs for the upcoming period: | Factory depreciation | $16,767 | | | Indirect labor | 41,553 | | | Factory electricity | 4,739 | | | Indirect materials | 9,841 | | | Selling expenses | 23,328 | | | Administrative expenses | 13,122 | | | | Total costs | $109,350 | | Factory overhead is allocated to the three products on the basis of processing hours. The products had the following production budget and processing hours per case: | | Budgeted Volume (Cases) | Processing Hours Per Case | | Tortilla chips | | 1,200 | | | 0.15 | | | | Potato chips | | 4,500 | | | 0.12 | | | | Pretzels | | 6,300 | | | 0.10 | | | | | Total | | 12,000 | | | | | | If required, round all per-case answers to the nearest cent. a. Determine the single plantwide factory overhead rate. $ per processing hour b. Use the factory overhead rate in (a) to determine the amount of total and per-case factory overhead allocated to each of the three products under generally accepted accounting principles. | | Total Factory Overhead | Per-Case Factory Overhead | | Tortilla chips | $ | $ | | Potato chips | | | | Pretzels | | | | Total | $ | | | Garfield Inc. manufactures entry and dining room lighting fixtures. Five activities are used in manufacturing the fixtures. These activities and their associated budgeted activity costs and activity bases are as follows: | Activity | Budgeted Activity Cost | Activity Base | | Casting | $214,360 | | Machine hours | | Assembly | 212,400 | | Direct labor hours | | Inspecting | 36,890 | | Number of inspections | | Setup | 45,220 | | Number of setups | | Materials handling | 51,940 | | Number of loads | Corporate records were obtained to estimate the amount of activity to be used by the two products. The estimated activity-base usage quantities and units produced follow: | Activity Base | Entry | Dining | Total | | Machine hours | 4,940 | | 4,380 | | 9,320 | | | Direct labor hours | 4,250 | | 6,370 | | 10,620 | | | Number of inspections | 1,650 | | 520 | | 2,170 | | | Number of setups | 280 | | 60 | | 340 | | | Number of loads | 840 | | 220 | | 1,060 | | | Units produced | 9,800 | | 4,900 | | 14,700 | | a. Determine the activity rate for each activity. If required, round the rate to the nearest dollar. | Activity | Activity Rate | | | Casting | $ | per machine hour | | Assembly | $ | per direct labor hour | | Inspecting | $ | per inspection | | Setup | $ | per setup | | Materials handling | $ | per load | b. Use the activity rates in (a) to determine the total and per-unit activity costs associated with each product. Round the per unit rates to the nearest cent. | Product | Total Activity Cost | Activity Cost Per Unit | | Entry Lighting Fixtures | $ | $ | | Dining Room Lighting Fixtures | $ | $ | | Pineapple Motor Company manufactures two types of specialty electric motors, a commercial motor and a residential motor, through two production departments, Assembly and Testing. Presently, the company uses a single plantwide factory overhead rate for allocating factory overhead to the two products. However, management is considering using the multiple production department factory overhead rate method. The following factory overhead was budgeted for Pineapple: | Assembly Department | $172,000 | | | Testing Department | 653,600 | | | | Total | $825,600 | | Direct machine hours were estimated as follows: | Assembly Department | 4,300 | hours | | Testing Department | 8,600 | | | | Total | 12,900 | hours | In addition, the direct machine hours (dmh) used to produce a unit of each product in each department were determined from engineering records, as follows: | | Commercial | Residential | | Assembly Department | 0.50 | dmh | 1.00 | dmh | | Testing Department | 1.00 | | 2.00 | | | Total machine hours per unit | 1.50 | dmh | 3.00 | dmh | a. Determine the per-unit factory overhead allocated to the Commercial and Residential motors under the single plantwide factory overhead rate method, using direct machine hours as the allocation base. | Commercial Motor | $ per unit | | Residential Motor | $ per unit | b. Determine the per-unit factory overhead allocated to the Commercial and Residential motors under the multiple production department factory overhead rate method, using direct machine hours as the allocation base for each department. | Commercial Motor | $ per unit | | Residential Motor | $ per unit | c. Recommend to management a product costing approach, based on your analyses in (a) and (b). The factory overhead determined under the single plantwide factory overhead rate and multiple production department factory overhead rate methods are . This is because the ratio of direct machine hours used by each product from the two departments is . However, the two production department overhead rates are . Thus, Peach should consider the easier rate method in this situation. Product Costs and Product Profitability Reports, using a Single Plantwide Factory Overhead Rate Elliott Engines Inc. produces three productspistons, valves, and camsfor the heavy equipment industry. Elliott Engines has a very simple production process and product line and uses a single plantwide factory overhead rate to allocate overhead to the three products. The factory overhead rate is based on direct labor hours. Information about the three products for 20Y2 is as follows: | | Budgeted Volume (Units) | Direct Labor Hours Per Unit | Price Per Unit | Direct Materials Per Unit | | Pistons | 11,000 | | 0.30 | | $46 | | $22 | | | Valves | 25,000 | | 0.15 | | 11 | | 4 | | | Cams | 4,000 | | 0.20 | | 61 | | 26 | | The estimated direct labor rate is $26 per direct labor hour. Beginning and ending inventories are negligible and are, thus, assumed to be zero. The budgeted factory overhead for Elliott Engines is $211,950. If required, round all per unit answers to the nearest cent. a. Determine the plantwide factory overhead rate. $ per dlh b. Determine the factory overhead and direct labor cost per unit for each product. | | Direct Labor Hours Per Unit | Factory Overhead Cost Per Unit | Direct Labor Cost Per Unit | | Pistons | dlh | $ | $ | | Valves | dlh | $ | $ | | Cams | dlh | $ | $ | c. Use the information above to construct a budgeted gross profit report by product line for the year ended December 31, 20Y2. Include the gross profit as a percent of sales in the last line of your report, rounded to one decimal place. Enter all amounts as positive numbers, except for a negative gross profit/gross profit percentage of sales. | Elliot Engines Inc. | | Product Line Budgeted Gross Profit Reports | | For the Year Ended December 31, 20Y2 | | | Pistons | Valves | Cams | | | $ | $ | $ | | Product Costs | | | | | | $ | $ | $ | | | | | | | | | | | | Total Product Costs | $ | $ | $ | | Gross profit | $ | $ | $ | | Gross profit percentage of sales | % | % | % | d. What does the report in (c) indicate to you? Valves have the gross profit as a percent of sales. Valves may require a price or cost to manufacture in order to achieve the same profitability as the other two products. Activity-Based Costing: Factory Overhead Costs The total factory overhead for Bardot Marine Company is budgeted for the year at $1,064,450, divided into four activities: fabrication, $496,000; assembly, $198,000; setup, $199,950; and inspection, $170,500. Bardot Marine manufactures two types of boats: speedboats and bass boats. The activity-base usage quantities for each product by each activity are as follows: | | Fabrication | Assembly | Setup | Inspection | | Speedboat | 7,750 | dlh | 24,750 | dlh | 56 | setups | 97 | inspections | | Bass boat | 23,250 | | 8,250 | | 409 | | 678 | | | | 31,000 | dlh | 33,000 | dlh | 465 | setups | 775 | inspections | Each product is budgeted for 5,000 units of production for the year. a. Determine the activity rates for each activity. | Fabrication | $ per direct labor hour | | Assembly | $ per direct labor hour | | Setup | $ per setup | | Inspection | $ per inspection | b. Determine the activity-based factory overhead per unit for each product. Round to the nearest whole dollar. | Speedboat | $ per unit | | Bass boat | $ per unit | | Single Plantwide Rate and Activity-Based Costing Whirlpool Corporation conducted an activity-based costing study of its Evansville, Indiana, plant in order to identify its most profitable products. Assume that we select three representative refrigerators (out of 333): one low-, one medium-, and one high-volume refrigerator. Additionally, we assume the following activity-base information for each of the three refrigerators: | Three Representative Refrigerators | Number of Machine Hours | Number of Setups | Number of Sales Orders | Number of Units | | RefrigeratorLow Volume | 100 | | 16 | | 48 | | 500 | | | RefrigeratorMedium Volume | 320 | | 15 | | 107 | | 1,600 | | | RefrigeratorHigh Volume | 1,070 | | 11 | | 160 | | 5,350 | | Prior to conducting the study, the factory overhead allocation was based on a single machine hour rate. The machine hour rate was $500 per hour. After conducting the activity-based costing study, assume that three activities were used to allocate the factory overhead. The new activity rate information is assumed to be as follows: | | Machining Activity | Setup Activity | Sales Order Processing Activity | | Activity rate | $480 | | $750 | | $170 | | | a. Complete the following table, using the single machine hour rate to determine the per-unit factory overhead for each refrigerator (Column A) and the three activity-based rates to determine the activity-based factory overhead per unit (Column B). Finally, compute the percent change in per-unit allocation from the single to activity-based rate methods (Column C). If required, round all per unit answers to the nearest cent. Round percents to one decimal place. For column C, use the minus sign to indicate a negative or decrease. | | Column A | Column B | Column C | | Product Volume Class | Single Rate Overhead Allocation Per Unit | ABC Overhead Allocation Per Unit | Percent Change in Allocation | | Low | $ | $ | % | | Medium | $ | $ | % | | High | $ | $ | % | b. Why is the traditional overhead rate per machine hour greater under the single rate method than under the activity-based method? The machine hour rate is greater under the single rate method than under the activity-based method because 100% of the factory overhead is is allocated by machine hours under the single rate method. However, only a portion of the factory overhead is allocated under the machine rate method using activity-based costing. The remaining factory overhead is allocated using the . Thus, the numerator for for determining the machine hour rate under activity-based costing must be less than the numerator under the single machine hour rate method. c. Interpret Column C in your table from part (A). Column C indicates that under activity-based costing the low-volume product has a per-unit cost than calculated under the single rate method. In contrast, under activity-based costing the high-volume product has a per-unit cost than calculated under the single rate method. This result will occur when there are activities that occur in proportions different from their volumes. In this case, volume products have setups and sales orders occurring in higher proportions of total setups and sales orders than their proportion of machine hours to total machine hours. The opposite is the case for the volume product. Thus, the lower-volume products are produced and ordered in batch sizes compared to the higher-volume product. This implies that Whirlpool may wish to simplify its product line by eliminating some of the volume products or by attempting to reduce the overall cost of setup and sales order processing activities. Sterling Hotel uses activity-based costing to determine the cost of servicing customers. There are three activity pools: guest check-in, room cleaning, and meal service. The activity rates associated with each activity pool are $8.60 per guest check-in, $16.00 per room cleaning, and $2.00 per served meal (not including food). Julie Stone visited the hotel for a 6-night stay. Stone had 4 meals in the hotel during her visit. Determine the total activity-based cost for Stones visit during the month. Round your answer to the nearest cent. $ | | | | | | | | |
